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Tax Relief, But Who's Relieved?


When in his State of the City address, Mayor Michael Bloomberg promised New Yorkers a billion dollars in "tax relief," he described it as "a broad-based package of tax cuts, designed to "make New York an even more attractive place."

So, should New Yorkers be rejoicing? Should they expect a windfall in their tax bills?

"Not really," said Doug Turetsky of the Independent Budget Office, answering the second question.

"It's clear that this is largely symbolic," said James Parrott of the Fiscal Policy Institute, answering the first.

Budget experts across the political spectrum say that the average New Yorker will not see a change in their tax bill, and that the plan will not do much to spur the economy. Some say Bloomberg's plan is a positive step, but could have been stronger; others say he has "squandered" an opportunity to reform a property tax system they see as much in need of reform.

HOW TO SPEND THE SURPLUS, AGAIN

For the fifth time in the last six years, the city has a large surplus. According to the Independent Budget Office, this year's total is $2.1 billion (report in pdf format), the windfall coming from big profits on Wall Street and the continued success of the real estate industry. The surplus will carry on into the next year, says the agency, but the city will face deficits in 2009 and 2010.

Last year (fiscal 2007 started last June), Bloomberg decided to use much of the $3.3 billion surplus to pay off debt. He also squirreled away $2 billion of it in a trust fund for retiree health benefits, citing projections for future budget gaps and the possibility that uncontrollable costs would increase. This pleased fiscal experts who had criticized Bloomberg, and Giuliani before him for spreading surpluses around in the past by cutting taxes and increasing spending.

But feeling flush, Bloomberg decided to spend much of this year's surplus on a $1 billion tax cut. The plan he laid out in the State of the City essentially sets off the annual budget season. He is scheduled to present his full budget sometime during the week of January 22.

The plan consists of four parts:
• A five percent across the board reduction in the property tax, which will cost about $750 million;
• An extension of the $400 property tax rebate for homeowners;
• The complete elimination of sales tax on clothing and footwear;
• New tax credits for small businesses.

All of these measures require the approval of lawmakers in Albany, except for the property tax cut, which only the City Council must approve.

Tax cuts are almost always popular politically, and these were no exception. What criticism there has been has been mild. The New York Times questioned whether the mayor was putting political considerations ahead of careful fiscal management, but then said that the "new tax cuts are not wildly imprudent." The City Council has been supportive, with Council Speaker Christine Quinn saying that officials will "make good on [the] promise" to cut property taxes in good times. Tax cuts had been on the agenda of many city council members even before Bloomberg's speech.

By making tax cuts the focus of his State of the City address, Bloomberg has essentially defined what the centerpiece of the budget for fiscal 2008 will be, say experts. Additional uses for the surplus – paying down future debt, infrastructure investments that may lead to lower operating costs in the future, or large spending initiatives – are probably unaffordable unless the council rejects the mayor's plan.

"It certainly puts a damper on any significant ongoing spending increases," said Doug Turetsky of the Independent Budget Office.

WASTING AN OPPORTUNITY ON PROPERTY TAXES?

The centerpiece of Bloomberg's plan is his property tax break, which city officials say is the first cut in property tax rates in over twenty years.

Bloomberg has long been working to recover from the fallout from the 18.5 percent property tax increase he pushed through in 2002, arguably the least popular action of his tenure to date. For the 4th consecutive year he is looking to give homeowners $400 rebate checks; this year the mayor also wants to give all property owners a single-year five percent reduction in property taxes.

"We can't know that we'll be as fortunate in the future with our revenues and expenses so right now it would not be fiscally sensible to commit" to permanent changes, said Bloomberg.

Most New Yorkers won't see a change in their housing costs, say budget experts.

This is partially because the cuts will just about offset the higher property taxes that will come with a recent reassessment of property values in the city, which showed a sharp rise. (This also makes Bloomberg's cuts more affordable for city government, of course).

The design of the tax cut also contributes, however.

Most New Yorkers do not own real property, so they experience property tax rates only through increased rents of various ways in which commercial property owners pass on the cost of their own high taxes. Renters helped pay for the recent increase in property taxes, say economists, but they won't receive any benefit from a temporary cuts in their landlords' taxes, because property owners are unlikely to lower prices when they know their own costs are set to go right back up.

"I would argue that a one year tax cut doesn't do what a tax cut is supposed to do, which is change behavior," said Nicole Gelinas of the Manhattan Institute. "Even if [Mayor Bloomberg] had to do a smaller tax cut to make it permanent, that would be better."

Parrott suggested a tax incentive directed at renters as a better temporary measure.

Almost all experts agree that the best action would be to address the inequities in the property tax code. Estimates vary, but commercial property owners and landlords pay rates that are four to eight times as high as private property owners (with the help of their tenants). Thus, while commercial landowners in New York pay the country's highest property tax rates, individual homeowners pay less in property taxes than they would if they moved to the surrounding suburbs.

But, as Gotham Gazette explained in a recent article, property tax reform is a political dead end, since any correction would likely mean much higher property rates for homeowners who, as the mayor might recall, are quite hostile to officials who raise their taxes.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 

Property Tax Reform -- NOT


New York City’s government will raise about $13 billion this year from the city’s property tax. That represents about 40 percent of all city tax revenues. It’s a tax that almost all New York residents and businesses pay, either directly as property owners, or indirectly as renters whose landlords pass through to them a substantial share of their property tax. But it is a tax that is extremely complex in its details – many would say incomprehensible – and a tax considered unfair by many taxpayers and critics.

So the new study of the city’s property tax system by the Independent Budget Office is a welcome event because it unravels the tax’s complexity and identifies which properties carry the lightest and heaviest financial burdens. The study, Twenty-Five Years After S7000A: How Property Tax Burdens Have Shifted in New York City, is, however, ultimately pessimistic about chances to simplify the tax and equalize its burdens. It suggests that no one -- neither the state legislature, Mayor Bloomberg, nor the city council -- is willing to take on the “minefield” that reform of the city’s property tax system would need to cross.

Perhaps the biggest contribution of the IBO study is its description of how the technical complexity of property tax law and administration is central to understanding the fundamental inequities of the system. In order to ensure that the big winners in the system – one-, two- and three-family house owners – maintain their low tax burden, state legislators, city mayors, and city councils have for 25 years repeatedly contorted the system to shift burdens to other properties – not only to commercial properties but also to the large apartment buildings where most of the city’s renters live.

Most of those renters not only live in buildings with high property tax burdens, but their household median income is only $35,000(half make more, half less), compared to median household income of house owners of $65,000. Worse yet, a major finding of the IBO study is that since 1981 the tax-burden disparity between house owners and owners of both large rental buildings and commercial properties has widened considerably.

Among several other findings, the most positive is that heavy property tax burdens carried by many low-income, low-market-value communities in the 1970s and early 1980s have been eliminated by the 1981 law (called S7000A). Less positive is the finding that many inequities exist within property types, so that a house or co-op in one borough has a higher or lower property tax than a house or co-op with equal market value in another borough. The study also notes that commercial property taxes are higher in New York City than any other U.S. city with a population over one million.

The Political History of the Property Tax

The 1981 state law was a response to a State Court of Appeals decision in a case filed in the late 1960s (the Hellerstein case) that determined that New York City and other jurisdictions in the state were in violation of a state law that required properties to be assessed at their full market value. In practice, communities were assessing residential and commercial properties at quite different fractions of full market value.

In New York City, for example, at the time of the Hellerstein case, city house owners’ assessments were only 25 to 30 percent of full market value, whereas commercial assessments were about 80 percent of full market value. Thus, house owners in effect paid taxes much lower than the commercial owners.

The extraordinary complexity that was built into S7000A in 1981 and expanded in subsequent changes made by New York City mayors and the city council stems from a simple political imperative: minimize house owner taxes and shift property tax burdens as much as possible to commercial and large rental buildings.

The first political step in the 1981 law was to legitimize the status quo that the state appeals court had found illegal. A new classification system was set up, with four classes of property: Class 1 houses; Class 2 rentals, co-ops and condos; Class 3 utilities; and Class 4 commercial properties. The share of taxes paid by each class at that time became the legal base, preserving the low house-owner share of taxes. Any future changes in market value in each class were to be added proportionally.

But the system had complex rules that protected house owners from increases in their class share, and over the next 25 years that original system was repeatedly juggled to further protect them from the full impact of rising market values. Thus, when house values rose faster than commercial property values and threatened to make the house owner share of taxes larger, the old and new political rules minimized those increases.

The Major Inequities in the Property Tax

The IBO study has extensive data on tax burdens, and a few examples will show the scale of differences (or inequities) among classes of property. Tax burden is measured by determining an “effective tax rate,” or ETR. It’s determined by simply dividing actual taxes paid by the full market value of a property. In an example of a house with a market value of $300,000, with a $2,400 tax bill, the ETR is 0.80 ($2,400/$300,000). In terms of real money this is generally described as paying 80 cents per $100 of market value.

Using full market value for each class of property makes it possible to compare ETRs across classes. If a different type of property, say a condo, also worth $300,000, had a tax bill of $4,800, twice that of the house noted above, its ETR would be 1.60 ($4,800/$300,000), or $1.60 per $100 of market value. In other words, the tax burden for the condo owner would be twice that of the house owner.

Here are some of the major shifts that have occurred since 1984:

  • The effective tax rate for Class 4 commercial properties used to be more than three times higher than Class 1 houses. Now they are almost eight times higher. (The rate for the commercial properties is 3.56. The rate for the houses is .46)
  • Co-ops used to be lower than houses. Now they are 1.5 times higher.
  • Elevator apartment buildings (Class 2) used to be almost three times houses (Class 1). Now they are more than eight times. (The elevator apartments buildings have a rate of 3.72. The rate for houses, again, is .46)

Will Anything Be Done?

The IBO study makes no recommendations for changes in the city’s bizarre, opaque, and inequitable property tax system, but it does list alternatives to the four-class system now used. They all assume “revenue neutrality,” that is, each alternative would raise the same level of taxes as the current system.

The first alternative laid out is a single tax rate for all property types. This would mean a massive shift of burden from commercial properties to private houses. For instance, such a shift would see house owners paying over 190 percent more, or over $5,300 more per owner, on average. Office buildings would get the biggest break, $2 billion overall, with an average saving of $324,000 per building.

Condos and coops in large buildings would have tax increases, respectively, of 94.5 percent (more than $4,500 per apartment) and 95.7 percent ($2,482 per apartment). Interestingly enough, for those interested in reducing renters’ burdens, taxes on the large elevator rental buildings would fall by over $1,500 per unit, nearly a two-thirds cut. If substantially passed on to tenants, there would obviously be a big easing of renter tax burden.

A second alternative uses what is most common in other jurisdictions: a two- class system -- residential and commercial. Keeping revenue neutrality and using full residential and commercial market values for assessment purposes, there would be big shifts within the residential class.

House owners would see a 72.9 percent increase (about $2,000 on average) and condos and co-ops in large buildings much smaller increases: 15.8 percent and 16.5 percent, respectively ($751 and $428, respectively). But the savings for large rental buildings would be substantial: a 78.7 percent reduction, or over $1,850 per apartment. (Changes in commercial Class 4 would, for the most part, be minimal.)

But of course any shifts of tax burden to house owners and condo/coop owners in both of these scenarios would have to reverse the politics at the heart of the 25-year old state law. Thus the IBO report sees little likelihood of fundamental reform. It points out that Governor Eliot Spitzer’s focus on property tax in his electoral campaign (reiterated in his January 3 State of the State address was to reduce burdens, not the systematic reform that is needed to fix the city’s system. Thus the report concludes, “Without another court ruling or some other external prod, it is not a minefield many legislators in Albany, or City Hall, appear ready to brave.”

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 

 

High Revenue, Obscure Spending


City Hall cannot be blamed for boasting about an increase in revenue to government coffers. But it is rightly criticized for obscuring information about how it spends the money -- specifically, its more than $11 billion in contracts with organizations outside of government.

Good News About The Budget

Recent city budget news promises another happy year for Mayor Michael Bloomberg, with new revenue estimates billions of dollars higher than originally forecast -- “a dramatic change,” according to Ronnie Lowenstein of the Independent Budget Office.

As part of the budget process, every November, City Hall issues an update on its proposed budget for the following fiscal year. The so-called November modification this year is in sharp contrast to the one four years ago, which included three billion dollars in new taxes in order to resolve a looming budget deficit of more than six billion dollars.

 

Thanks to an increase in real estate transactions and in other business activity, both of which mean higher tax revenue, city officials estimate that the current fiscal year will end in June 2007 with the city government having a surplus of nearly two billion dollars. And though they are still projecting a deficit over the following years, these are expected to be far less than the initial estimates. The estimate for the deficit in fiscal 2008 has gone down from $3.8 billion to $510 million. In 2009 and 2010, the deficits are expected to be far higher -- $4.1 billion and $3.6 billion respectively – but these are less than were projected when the initial estimates were made, back in June.

No one at the city council or city comptroller’s office is reportedly suggesting that those initial revenue estimates had been underestimated by design -- to keep the council and budget advocates from finding ways to spend the now-recognized revenues.

But City Hall is less forthcoming when it comes to issues of how it spends the money.

Obscuring News About Contracts

The annual report from the Mayor’s Office of Contract Services provides raw data about the sheer volume and scale of city purchases -- over 46,000 purchases of goods and services in 2006, worth $11.4 billion.

City Hall’s extensive use of contracts – the subject of an Issue of the Week in Gotham Gazettealmost five years ago – is little discussed, but very important. As Seth Forman explained:

Since the 1980s, fiscal conservatives have been touting the use of private contractors as a cost-saving measure, pointing to municipalities that have realized impressive savings. Liberals remain more skeptical about putting such government services as education and prison management in the hands of profit-hungry private businesses. But the issue no longer has the ideological gloss it once did. Most Democrats and Republicans, liberals and conservatives, see contracting as a routine approach to the management of government services. Former New York State Governor Mario Cuomo told the authors of Reinventing Government in 1992, "it is not government's obligation to provide services, but to see that they're provided."

Critics see the problem not with the use of contracts per se, but with the lack of monitoring of them.

The 2006 report from the Mayor’s Office of Contract Services, entitled Agency Procurement Indicators, has little to say about management performance, good or bad, and hides what others see as bad news.

Until 2002, this annual report on contracts was a part of the Mayor’s Management Report, but since then it has been published separately, and it now gets little or no attention. Yet the huge scale of the city’s purchases suggests that the report should be a central document in addressing city management issues.

What the public gets, in fact, is a lot of information but little analysis. It may be useful, for instance, to know that in 2006 there were purchases of:

  • $3.8 billion in human services
  • $1.5 billion in professional services
  • $1.1 billion in goods
  • $885 million in architecture/engineering services

It may also be useful to see the city publicize the scale of subcontracting by agency vendors – the oversight of which is a neglected second layer of city management issues: 2,500 new subcontracts in 2006 valued at almost $1.5 billion.

The report also cites methods of procurement and procedures to ensure competitiveness, and reports on new programs that broaden business opportunities for companies owned by women and minorities.

But missing is a consistent methodology to measure performance over time -– the setting of goals, performance standards, and evaluations.

Also missing is any mention, let alone performance measurement, of some $3 billion in contracting at the city’s department of education. A city council hearing on November 21 highlighted what the Daily News discovered was a “record-breaking” $121 million worth of no-bid contracts last year. The department argued that the no-bid contracts are necessary for rapid, efficient responses to its needs. The city comptroller (whose office reviews and registers other city agency contracts, but not education contracts) says he will propose state legislation to stop the current practice.

Timeliness of Contracts

City government agencies routinely delay the completion of a contract with outside organizations for as long as a year, but on average about four months. One of the reasons why these delays matter, as Susan Buttenwieser pointed out in an article in Gotham Gazette entitled Breaking The Contract With Nonprofits, is that such routine delays in payment force many non-profit agencies who have these contracts to borrow money in order to provide the promised services. These organizations then collectively pay millions of dollars in interest that will never be reimbursed.

One section of the 2006 contracting report is focused on the timeliness of the contracting process, and makes a token nod at a substantive performance measurement. But it devotes only a third of a page to processing times of competitive contracts with sealed bids (only one of many contracting methods). A table shows that in 14 agencies, the process, or “cycle time,” ranges from 58 to 339 days, averaging 125 days, and that this is an increase from an average of 118 days in 2005. The explanation for the increase is cryptic: “year-to-year fluctuations in the size and complexity of awards.”.

That’s it for analysis of processing time.

Yet last year’s report had an interesting five-page analysis of processing times for another method of contracting, requests-for-proposals (or RFPs) in human-service agencies. One of its useful findings (for year-to-year comparisons) was that cycle times for this method were longer than for contracts based on bids – 158 days compared to 118 days.

The 2005 report also admitted that “most oversight agencies lack electronic tracking systems, and none of the systems that exist are linked to one another to permit a fully transparent view into the procurement process.”

Although progress was promised for 2006, there is no update to this analysis in the 2006 report.

He Said, She Said

The other indicator of timeliness in the 2006 report is an update on retroactive contracts, long a sore point for vendors, especially human-service organizations with limited financial capacity that must carry the financial burden until their contracts are registered. But much of its good news is contradicted by the city comptroller’s reports on the same problem.

The city comptroller and the Mayor’s Office of Contract Services, using different timelines and definitions, have for years been at odds in their analyses of retroactive contracts. The comptroller has generally found the problem to be bigger and identified less progress than has the mayoral agency. The Mayor’s Office of Contract Services issues one report a year; the comptroller issues monthly as well as annual reports on retroactive contracts in client-service agencies.

A look at one city agency shows the inconsistencies between the analyses of the city comptroller and the office of contract services. The comptroller’s report identified 1,366 late contracts in 2006 at the Department of Youth and Community Development, compared to only 238 deemed late by the Mayor’s Office of Contract Services.

Percentage of late contracts?
The comptroller says 92 percent, worse than previous years.
Contract services says 73 percent, better than previous years.

Average number of days contracts were late?
The comptroller says 148 days.
Contract services says 64 days.

In its brief text, the report by the Mayor’s Office of Contract Services sees almost exclusively good news. But the bad news overall for analysts and the public is that until this mayoral agency and the city comptroller are on the same page in these analyses of contract administration -- and until education contracting is subject to the same rules as other city agencies -- there will continue to be doubts about how well the mayor is measuring management performance.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001. 

 

 

 



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